Emerging from disruption: The future of pharma operations strategy

By Hillary Dukart, Laurie Lanoue, Mariel Rezende, and Paul Rutten


To maintain profitable and resilient operations, CEOs and COOs of pharma companies may need to make bold changes to their operations strategy as the industry navigates new challenges.

In the past, many pharmaceutical companies (pharmacos) deprioritized operations strategy in the face of competing business pressures. This is now changing. Factors such as the COVID-19 pandemic, inflation, geopolitics, new therapeutic modalities, and new ways of working make it vital for pharmacos to carefully reconsider their long-term choices in sourcing, manufacturing, and supply chain.


Now is exactly the right time for this renewed emphasis on operations strategy, as pharmacos emerge from two years of intense firefighting. Succeeding in pharma under these new and challenging conditions will require succeeding in operations.

The focus for operational leaders may need to shift from the prevailing emphasis on continuous improvement—including cost savings, quality assurance, and constant readiness to deliver—to longer-term external challenges. These include high inflation and an increase in complexity and risk, as well as the compounding effects these forces have on each other.

Pharma operations leaders now have an opportunity to deliver even greater value to their organizations by achieving this shift in focus, but they must act quickly to keep abreast of the challenges confronting the industry. The effort will require enormous mobilization and thoughtful prioritization. This task will fall to leadership; only the CEO and head of operations are in the right positions to make it happen.

This article explores the challenges facing pharma leaders and the steps they can take to develop a more strategic, long-term, and integrated approach to operations strategy. It presents questions leaders can ask as they design the solutions needed to make sure operations can protect enterprise continuity while still delivering to patients.

A perfect storm of external challenges

The pharma industry is facing a multitude of challenging trends (Exhibit 1). Global demand is growing rapidly, and the unprecedented need for COVID-19 vaccines and therapeutics has put additional pressure on the industry. The industry’s ability to find innovative solutions to deliver COVID-19 vaccines while still meeting overall demand is a remarkable achievement, but rising global demand is still a significant challenge for the industry in the long term.


Exhibit 1

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The product landscape also is changing swiftly. New modalities, such as cell and gene therapy and mRNA vaccine technology, have increased from 11 to 21 percent of the drug development pipeline—the fastest growth ever seen in the sector. This change is likely to bring more fragmentation of technology, new supply chains, and unique product life cycles.

In addition to these industry-specific trends, pharma has also been affected by broader global trends, such as supply chain pressures. While the pharma industry is considered somewhat protected by its high inventory levels and long-standing dual sourcing, over a given ten-year period, the likelihood of supply chain disruptions still represents a potential loss of 25 percent of EBITA. Inflation has risen in recent months to levels not seen for decades, leading to increasing costs for labor, raw materials, and transportation. This is over and above the persistent price pressures pharma is already facing, particularly in generics. Since pharma customers are not expected to fully absorb these cost increases, profit margins are under pressure.

Meanwhile, increased state interventions and protectionist trade policies are creating new pressures on manufacturing networks and could drive increased regionalization. This would be a capital-intensive exercise: to regionalize just 10 percent of current vaccine trade in one particular geographical region, governments would need to invest an estimated $100 million.


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The pharma industry is also facing talent shortages linked to wider labor market trends, including the 20 percent increase in demand for STEM-related roles across the life sciences industry in the United States. The current pool of pharma digital talent is at least 14 percent lower than demand, and many companies are finding it challenging to recruit technical talent. Compounding this challenge is the rise of remote working, which has increased employee expectations for flexibility. In response, nearly all pharmacos are experimenting with hybrid working models.

A few major trends point to an industry tailwind; one of them is the advancement of digital and analytics tools. Digital tools, robots, and sensors are becoming cheaper and easier to access, and they can be used to capture all manner of raw data. In addition, edge computing and cloud analytics are providing real-time optimization and transparency. Pharmacos are working to leverage the power of data to become more agile and resilient. However, to date, no pharmaco has emerged as a true global leader in this field.

The pharma industry is facing a multitude of industry-specific and global trends. But a few major trends point to an industry tailwind; one of them is the advancement of digital and analytics tools.

Each of these global trends represents significant challenges in and of itself, and the trends may be compounded and strengthened through their interactions. This compounding effect can add to the complexity of evaluating an effective strategic response.


Major implications for pharma

These global trends have six major implications for pharmacos: rising operational complexity, increasing risk, shifting capability requirements, higher capital expenditure requirements, variable-cost increases, and opportunities for savings (Exhibit 2).

Exhibit 2

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Operations leaders may need to become comfortable navigating a more complex ecosystem as they respond to increased operational complexity. Risks may increase due to rising environmental, social, and governance (ESG) expectations and skills gaps, while new modalities and digital acceleration will also likely lead to a shift in capability requirements. This could necessitate reskilling and upskilling of staff, as well as a renewed focus on recruiting from outside of the pharma industry.

From a cost perspective, the pharma industry may see significantly increased capital expenditure requirements related to the construction of new sites and new digital infrastructure. Increases are also likely in variable costs in areas such as raw materials, transportation, and employee attrition, reskilling, and salaries.


Future of pharma operations


Pharma companies are experiencing a wave of innovations – from new treatment modalities, to smart machines, advanced analytics, and digital connectivity.

Although these implications are challenging, they may represent possible opportunities for savings in several areas. For example, ESG commitments on waste reduction could reduce costs, as could successful digital implementation. However, the challenge lies in monetizing these cost savings, given that the industry has long created value largely through revenue expansion rather than through cost savings.


original article (https://www.mckinsey.com/capabilities/operations/our-insights/emerging-from-disruption-the-future-of-pharma-operations-strategy)